Is Skyworks Solutions Being Unfairly Punished?

The repercussions of the Chinese stock market crash can be seen in the U.S. stock exchange as many stocks have fallen considerably in the last few months. While I can understand why companies with huge exposure to China have plunged, some stocks have been punished undeservingly. One such stock is Skyworks Solutions (SWKS). I first called Skyworks Solutions a buy when it was trading at just over $28, and the stock has appreciated almost 200% since then.

Despite its trailblazing run, Skyworks is down about 20% from its all-time highs due to the weakness of the Chinese economy.

While Skyworks does depend on China for growth, the company has a diversified business model, which is why I think the stock is being unfairly punished.

The company will likely benefit from the recent launches of the iPhone 6S and the iPhone 6S Plus. According to reports, Skyworks has gained dollar-content in both the devices and this should benefit the company going forward. Analysts at B. Riley said:

“We have followed up with SWKS and believe there is higher content yy in the iPhone 6S and Plus. As has happened with prior flagship teardowns such as 1H15’s Galaxy S6 part miss-identification means content’s better than appears on the surface. “

Skyworks has been growing dollar-content in iPhone devices consistently over the years, however the company’s dependence on Apple for revenue-generation has reduced considerably over the last few years.

Despite the fact that Apple likes to have high pricing power over its suppliers, Skyworks has increased dollar-content in the iPhones without comprising margins. This clearly indicates that Apple values Skyworks highly as a supplier die to the company’s high quality products.

Also, Apple sold 13 million iPhone 6s units during its launch weekend, marking a 30% jump over its predecessor. Although the sales this year included numbers from China, which weren’t included the last time, the company still posted a decent increase of 5%. Growing iPhone sales and high dollar-content are massive tailwinds for Skyworks going forward.

Also, unlike few of its peers, Skyworks guidance for the upcoming quarter is strong. The company has beaten the analysts’ estimates for six consecutive quarters and has raised its guidance every time. Although the Chinese stock market crash may have a negative impact on the company, I think all the bad news has already been priced in the stock. The company’s diversified business model will make up for the loss incurred due to lost sales in China.

Conclusion

Skyworks is currently down over 20% from its all time-highs, and the stock looks undervalued. Skyworks’ earnings and revenue are expected to grow at a double-digit pace for FY2015 and FY2016. The chipmaker is currently trading at under 13x forward earnings, which is very cheap given the expected growth. A company with growth prospects of Skyworks usually trades at 20x forward earnings. The company also has a dividend yield of 1.27%, which makes the stock very attractive.

As of now, Skyworks looks dirt cheap, and investors should use the current dip to increase their positions in the company.